Bri­tish Gas to feel £300m burn of price cap

Owner Cen­trica to be worst af­fected by Ofgem’s ef­forts to cut en­ergy bills by cap­ping sup­plier’s tar­iffs

The Sunday Telegraph - Money & Business - - Business - By Jillian Am­brose

THE Gov­ern­ment’s as­sault on the prices charged by en­ergy sup­pli­ers could wipe out a quar­ter of the earn­ings made by Bri­tain’s largest en­ergy com­pany un­der fresh pro­pos­als put for­ward by the reg­u­la­tor.

The owner of Bri­tish Gas stands to be the hard­est hit by the plan to cap stan­dard vari­able en­ergy tar­iffs with a £300m blow to its earn­ings, which are al­ready un­der pres­sure due to rising costs and fall­ing cus­tomer num­bers. Cen­trica and its near­est ri­val, SSE, are also in the po­lit­i­cal fir­ing line af­ter hik­ing en­ergy prices for mil­lions of homes and in­flam­ing ten­sions with gov­ern­ment min­is­ters who have vowed to put an end to “rip off ” en­ergy tar­iffs by the com­ing win­ter.

An­a­lysts at AB Bernstein be­lieve that Ofgem’s lat­est pro­pos­als, set out in a 400-page in­dus­try con­sul­ta­tion last week, sug­gest the price cap will be close to the cur­rent cap put in place for cus­tomers on pre-pay­ment me­ters, at around £1,078. This is around £100 cheaper than the av­er­age stan­dard vari­able tar­iff cur­rently on the mar­ket. For the largest listed en­ergy giants the hit would be much higher. The dif­fer­ence be­tween the Bri­tish Gas stan­dard tar­iff and the ex­pected cap is £305 a year, and SSE’S de­fault rate is £207 above the cap. The pair also have a higher pro­por­tion of cus­tomers on stan­dard tar­iffs.

The an­a­lysts warned that the fu­ture prof­itabil­ity of en­ergy giants was “more com­pli­cated” than cal­cu­lat­ing the dif­fer­ence in stan­dard rates, mul­ti­plied by the num­ber of cus­tomers on the de­fault tar­iff.

Re­cent price rises across the in­dus­try are thought to be an at­tempt to soften the blow of an an­tic­i­pated hike, they said. The sec­tor’s larger play­ers are also build­ing up their de­fences against gov­ern­ment in­ter­ven­tion by driv­ing efficiency mea­sures through their ver­ti­cally in­te­grated com­pa­nies.

How­ever, share­hold­ers in Bri­tish Gas’s par­ent com­pany, Cen­trica, are still ex­pected to take a se­ri­ous hit to their earn­ings per share, which could fall by as much as 28pc, ac­cord­ing to AB Bernstein’s cal­cu­la­tions. A spokesman for Cen­trica de­clined to com­ment on the cap’s ex­pected fi­nan­cial toll.

“We con­tinue to be­lieve price caps can dam­age com­pe­ti­tion and re­sult in poor out­comes for cus­tomers,” he said. “How­ever, we are now re­view­ing the doc­u­ment in more de­tail and wel­come the op­por­tu­nity to en­gage con­struc­tively with Ofgem through the con­sul­ta­tion process.”

Ofgem has nar­rowed its ap­proach to set­ting the price down to three op­tions. The first adapts its ap­proach to the price cap for cus­tomers on pre-pay me­ters to take into ac­count the cost of rolling out smart me­ters plus head­room of less than £70 to spur com­pa­nies to com­pete with each other through efficiency. The se­cond is a chal­leng­ing “bot­tom-up” ap­proach that estimates the cost of each com­po­nent within an en­ergy bill in­clud­ing whole­sale mar­ket prices, net­work charges, pol­icy and oper­at­ing costs as well as a con­ser­va­tive profit mar­gin and head­room.

“Ofgem will likely pick the bot­tomup method­ol­ogy or the ad­justed safe­guard method­ol­ogy or an av­er­age of the two,” said Deepa Venkateswaran, of AB Bernstein.

Ofgem will fi­nalise its ap­proach by late Au­gust be­fore set­ting the cap in Oc­to­ber and putting it in place by the end of the year.

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